Market Drivers January 8, 2015

Euro breaks fresh lows as 1.1800 given
Aussie shows relative strength on cross flows
Nikkei 1.67% Europe 1.29%
Oil $48/bbl
Gold $1208/oz.

Europe and Asia:
AUD Building Approvals 7.5% vs. -2.7%
EUR GE Retail Sales 0.6% vs. 0.3%
EUR GE Unemployment -27K vs. -6K
EUR CPI 0.8% vs. 0.6%

North America:
USD Unemployment Claims 8:30

Another night and another record low in the EUR/USD as the pair slid below the 1.1800 figure today for the first time in nearly a decade.The move lower wasn’t driven by any specific economic news but rather by the general investor malaise affecting the region along with fresh geopolitical risks that have arisen in light of the horrific terrorist murders in Paris yesterday.

Today yet another policewoman was killed in Montrouge a southwestern suburb of Paris, in what appeared to be another attack by Islamist extremists. France is now on its highest alert as officials hunt down the killers. The attacks have not only exacerbated the religious tensions in a country that hosts the largest Muslim population in Europe but may have chilling effects on commerce as well if the spate of murders continues much longer.

The combination of new political crisis and continued economic stagnation has completely soured investor attitudes towards the euro and conventional wisdom now is that it is no longer a question of when. but rather how much will ECB do in QE as it tries to jumpstart the moribund economy. The single currency is now grossly oversold on a short term basis, but with sentiment so skewed against it it may drift lower still before attempting any short covering bounce. For now the 1.2000 level which acted as support only a few days ago will now prove to be formidable resistance as late seller will likely cap any rally.

One reason for euro’s rapid decline is its new found role as the funding currency for the carry trade. With short term EZ rate negative, it actually pays to borrow the euro and buy higher yielders against it. That’s why Aussie and Kiwi have shown relative strength in today’s trade as investors continue to favor the two comm dollar high yielder in their search for returns.

The Aussie also received a boost from better than expected economic data as building approvals rose 7.5% versus -2.7% projected decline. Lower rates and lower oil prices continue to support the Australian economy. Indeed one of the side benefits of lower prices may be a better than expected growth out of China which in turn could help boost Australia’s fortunes this year. Little wonder then that the EUR/AUD trade is attracting carry flows as investors seek to benefit from relative strength.

In North America the calendar is very light with only jobless claims on the docket. The market may begin to position for the NFPs which will be the marquee event of the week with consensus looking for another 200K month of growth. If the data misses the target it may finally provide some room for EUR/USD to stage a short covering rally. For now the pair may try to climb back towards the 1.1800 figure as the day proceeds.

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